Firing Line

- Boom and bust, then and now.

This week on "Firing Line."

- Ultimately, every crash is really about one thing.

It's about credit, it's about debt.

That is the match that lights the fire of every financial crisis.

- The American financial system is rocked to its foundation.

- [Margaret] Financial journalist Andrew Ross Sorkin laid out the causes of the 2008 financial meltdown in his bestseller "Too Big to Fail."

(bell clanging) His new book, he takes on the big one, 1929.

- The truth is there wasn't a crash just on one day and all of a sudden there was a depression.

There was a series of crashes.

- Sorkin says exploding myths about 1929 may help us prepare for the next crisis, shedding light on the lead political figures from the era from President Coolidge, to Roosevelt, to Herbert Hoover.

Of the false narratives about the Great Depression, which one surprised you most?

- Well, one that I think that you would appreciate is Hoover's reputation.

- [Margaret] Could any president have stopped it?

- I think it would have been very, very hard to do such a thing.

- [Margaret] What does Andrew Ross Sorkin say now?

- [Announcer] "Firing Line with Margaret Hoover" is made possible in part by Robert Granieri, Vanessa and Henry Cornell, The Fairweather Foundation, The Tepper Foundation Peter and Mary Kalikow The Beth and Ravenel Curry Foundation Pritzker Military Foundation, Cliff and Laurel Asness, and by the following.

- Andrew Ross Sorkin, welcome to "Firing Line."

- Thank you for having me.

- Your new book, "1929," states that the 1929 stock market crash is the most significant and largely misunderstood economic calamity in history.

Almost 100 years since the crash, why is it still so misunderstood?

- I think, for some reason, most Americans today have this vague conception that something very bad happened in October of 1929, and that all of a sudden, we had the Great Depression.

- Yeah.

- And if you ask them about what led to it, what happened in the midst of it, what happened after, they don't really know.

And I say this because I was one of them.

After writing "Too Big to Fail" about the 2008 financial crisis, people used to ask me all the time, "So how does that crisis compare to 1929?"

- Yeah.

- And I had read, you know, Kenneth Galbraith's great book about the crash, which he wrote in the mid-'50s, but I didn't really know the details.

I didn't know who the people were.

I didn't know what they had said to each other.

I didn't really understand sort of the breadth of what really took place and how it happened.

And that's why I went about trying to actually tell that story because the truth is there wasn't a crash just on one day, and it didn't just sort of all of a sudden happen that there was a depression.

There was a series of crashes that led to another series of dominoes and policy choices that led to, effectively, 25% unemployment by the time we got to 1932.

- Charles Mitchell.

- Yeah.

- The CEO of National City Bank.

He is not a known figure.

I mean, he becomes a protagonist in the book, but he is not a known figure to many Americans.

- [Andrew] Right.

- Who is he?

Why is he important?

- So I would argue that Charlie Mitchell was the most significant figure, and this surprised me in terms of just how other people have written this history, he was the most significant Wall Street figure at that time.

He was the Jamie Dimon of his time.

He was on the cover of magazines at that time.

He really did help invent the very idea of lending people money so they could buy stock.

- Credit.

- Credit.

By the way, prior to the '20s, the Roaring Twenties, nobody took on loans.

A mortgage was considered a moral sin in America.

- Debt was a dirty word.

- Debt was a dirty word, and it really actually wasn't until General Motors and actually a guy named John Raskob, who's also a character in this book-- - Oh, we'll get to him.

- Comes up with this idea.

He's running General Motors.

How are we going to to sell more cars?

We'll start loaning people money so they can buy our cars.

And once that happens, it really changed and transformed and powered so much of the Roaring Twenties because all of a sudden, credit became available to buy all sorts of things, including stock.

- Okay, so explain the role of speculation.

I mean, one of the things I really learned reading the book was how the speculators were running wild.

And we knew that the stock market crash was caused by speculation, but how are they doing it?

- Well so there was... The backdrop, of course, is that there's this massive euphoria in the whole country and so many people now playing the stock market.

People are going to brokerage houses, and they're putting down money and getting loans.

And so you had a lot of people that were just betting on all of this.

But underneath it was something that was more insidious, which was a group of the elite investors, if you will, and, by the way, some of the corporate leaders even that were involved in trying to manipulate the market through these things called investment pools where they literally would create these pump-and-dump schemes, where they said, "Okay, this stock, this week, we're gonna pump it.

We're going to pay journalists off to write great stories about it."

And then practically, we're going to have the equivalent of almost having actors on the trading floor saying, you know, "I'm in for 120, I'm in for 140," and all of it was fake.

- Artificially raising the price of the stock.

- Artificially raising the prices.

And it was somewhat oddly out in the open that this would happen.

Sometimes you'd read an article and say, "There's a pool operation in this stock."

- It wasn't illegal.

- It wasn't illegal, and so there were other people who were not in on the pool who thought to themselves, "Okay, if I can get in and out of the stock before the pool breaks," meaning before they pull the rug, that they can make money too.

So it sort of just created this sort of bizarre sense of speculation.

- Yeah, through the characters that you illustrate, you set up these rivaling schools of thought about how the market should be managed.

- Yes.

- Many of the bankers opposed any kind of government intervention.

- For sure.

- Even as the market fluctuated wildly through the 1920s and up to 1929, what was going on in the American psyche that was at that time quite resistant to government intervention in financial markets?

- Well, look, I think that, you know, Coolidge was... President Coolidge, who was in office prior to President Hoover, was a very hands-off kind of president.

I mean, that was sort of what he was known for more than anything.

- Silent Cal.

- And the truth was that I think as much as President Hoover, and maybe you could speak to this better than I can, thought that he knew the kinds of things that he could do to try to manage things, that his preference was to be hands-off, if possible.

At least I think initially when he first became the president.

So I think because of that, there was just a different sense of how to approach this.

I mean, it-- - Well, there was also no precedent for government intervention in the financial market.

- No one had ever done this.

- Yeah.

- And not only that, well, interestingly, the other piece of this was that the Federal Reserve mostly sat on its hands, even though they were scared out of their mind that things were getting out of control, and they wanted to tamp things down.

They were so worried, frankly, about the potential political pressure.

This is such a new institution, it was born in 1913.

- Yeah.

- And so there wasn't this sense of, "Let's do something."

And they had been worried that they were getting blamed.

And so there was a lot of sort of emotional issues here.

- You tackle many false narratives about the Great Depression.

You know, one of them is that, as you mentioned just a moment ago, the Great Depression was the result of one bad day on Wall Street.

- Right.

- Of the false narratives about the Great Depression, which one surprised you most?

- Well, one that I think that you would appreciate, oddly enough, is Hoover's reputation.

So Hoover, I think, in most books, has a relatively complicated, to put it politely, but if not worse than that-- - [Margaret] I was taught in seventh grade that Herbert Hoover caused the Great Depression.

- Right, most-- - This is what most people thought for many, many years.

- I think a lot of people have a very dim view of Herbert Hoover and how he reacted in the moment and everything that took place.

What I did not know was the role of John Raskob.

John Raskob was maybe like an Elon Musk kind of character in the 1920s.

He'd run General Motors.

He got involved in politics.

He'd been a Republican.

Turns to be a Democrat.

And then effectively, secretly decides to use his personal fortune for the next year or two to try to undermine the reputation of Hoover in the press, doing all sorts of, you know, underhanded things, putting out stories in all sorts of places.

I mean, this would be like having a sort of full-on campaign against the reputation of a president.

And I do think almost to this day that because of what he was doing, and John Raskob hires a guy named Charlie Michelson to basically do his bidding, and to do this work for him secretly, and it ultimately comes out later.

I think it actually has a demonstrable impact on the dim view that people have of Hoover's role during this period.

- Of course, President Hoover who, as you probably know, and viewers know, I tend not to miss an opportunity to weigh in on where the narrative has been incorrect or inaccurate or unfair.

You write that of all the people who could have been president in 1929, Hoover seemed best prepared, not only to handle a crash but maybe even to head one off.

And you write about this because there were attempts by those in the financial industry and around it to persuade Hoover to get the Federal Reserve to weigh in, to intervene in some way.

Could the right intervention have headed off the crash?

- So here's where my sympathies lie with President Hoover.

He shows up on the scene on March 4th of 1929.

The crash happens October 1929, but it's not a lot of time to jump in front of the train.

Now, the question is, if you could have jumped in front of the train, how would you have jumped in the front of the train?

If you could go back in time, what would have you done?

You would have called up all the banks, and you would have said, "You cannot make loans to people for more than, you know, one or two times the equity that they're giving."

So if you're going to put down a dollar, we'll give you $2.

but we're not going to give you $10.

- Right.

- But, you know, everybody was so scared of trying to slow down the train.

- So could any president have stopped it?

- I think it would have been very, very hard to do such a thing.

- You write about a famous anti-Hoover banquet.

- Yes.

- And you just referenced that John Raskob, this businessman who wanted to devote his entire personal fortune to bringing down Hoover's reputation, that anti-Hoover banquet was held in April of 1929.

- Yes.

- A month after Hoover was inaugurated.

Six months before the crash.

- Six months before the crash.

- So what does that tell us about the politics of the era?

That this didn't even have to do with tying Hoover to the Great Depression.

There was just an explicit partisan effort to degrade Hoover prior to the Depression.

- Oh, it had nothing to do with the crash.

I mean, the crash became, you know, a great talking point for Raskob's, you know, team.

- It was sort of a gift, yeah.

- It was a gift to Raskob and a gift to this guy, Charlie Mickelson, who was putting out these materials all over the country without people appreciating how this was getting out and who was funding it all.

- After Hoover became president, you write that he viewed it was beneath was position as president to respond to the partisan attacks.

You write a quote from him.

"A president cannot with decency and with proper regard for the dignity of his office reply to such stuff."

- I mean, think about where we were in 1930 compared to where we are now.

- Ultimately, was the choice of Hoover's not to engage with the partisan slander, that he knew was partisan slander, part of what contributed to his political downfall?

- Well, I think in terms of his reputation, I think part of his problem was that he didn't engage with that.

And he didn't really engage with the press in a meaningful way.

And so he didn't have the press on his side because there was almost an arm's length remove that he always held.

And I think he thought that that, you know, was sort of... there was a dignification of what it meant to be the president, that you kept everybody at arm's length.

But I think ultimately, in some ways, that made it a lot tougher for him to communicate.

- I think your assessment of his shortcomings with communication is accurate and very fair.

Hoover, as you also mentioned, was an orphan.

He didn't have parents.

He had a very hard upbringing.

And I think he couldn't emote publicly in the way that FDR could on the radio waves and other things.

So I think your assessment of his ability as a mass communicator is apt.

- And oddly enough, it may be that during a financial crisis, communication becomes a uniquely important tool.

- Any kind of crisis.

- And one of the things that he was trying to do was, you know, he had this thought that you can almost jawbone your way out of a crisis, right?

There was a period of time where he really did consider the crash almost a psychological problem.

And that he really believed that there was a market, a stock market over here and a real economy over here.

And I do think that he might have missed how seriously they had become connected.

And so there was lot of things that he would tell the public, effectively sort of a "buck up" kind of approach.

And I think that there are a lot of people in the public that were saying, "I can't buck up."

- You write in the book that polling, some of the first polls-- - First polls.

- Political polls- Unbelievable.

- Happened in the 1932 election.

- 1932 election.

First polls, real polls.

- And the seminal issue in the 1932 elections was not the stock market or the economy, it was Prohibition.

- So, again, one of the great surprises, for me at least, as somebody who was trying to understand this period, I always thought, and maybe it was just conventional wisdom, that Hoover lost the election because the economy was lousy.

That seemed to make sense.

We always talk about how voters vote with their wallet, and here we were in what seemed like a pretty tough period of time.

But the truth was that he was so wedded to the issue of Prohibition.

- And Franklin Delano Roosevelt, his opponent, was in favor of repealing it.

- And as a result... But there was a period of time where I think he had a choice.

He could have reversed himself on the Prohibition piece and then I wonder whether he would have won.

- When Franklin Delano Roosevelt defeated Hoover in 1932, at the time in this country's history, there was a four-month interregnum.

In other words, the election was over in November, but the new president didn't take office until March 4th, four months later.

And in the time of an economic crisis, that's a lot of time for instability.

And throughout that period of time, Hoover and Roosevelt were trading letters.

Hoover, in particular, wanted some cooperation for the sake of stability of the financial markets that he felt was unrequited from FDR.

Up until the eve of the inauguration of FDR, at 11:30 at night on March 3, 1933, Hoover was trying to get Roosevelt to issue a statement to prevent a bank collapse.

- So for months Hoover had effectively been begging Roosevelt to find a way to create a bank holiday.

He really believed that the banks needed to be bailed out, that the banks were in much worse shape than the public understood.

And actually, this is where-- - Is it true that FDR didn't understand as well as Hoover what shape the banks were in?

- It may very well be that he understood, but he didn't wanna take on the political liability of effectively endorsing a Hoover plan.

- Yeah.

- But this is where Hoover actually deserves credit that he does not get.

One of the reasons that we ultimately had 9,000 banks fail in America, and I think a lot of those failures potentially could have been, some of them could have been prevented, is if there had been a bank holiday or rescue that had taken place earlier.

And one of the things was I think Hoover was resistant earlier to some of these rescue efforts, in large part 'cause he had told people that it was a psychological problem.

I do think that that was part of the issue.

- That was incorrect.

- But then, in this interregnum period, Roosevelt didn't want to endorse something that Hoover would be doing because he wanted to start with a clean slate.

- Right.

- And so he would effectively lie to Hoover and say, "I'm not doing any of this, I am not doing any of these things."

And then, of course, the second he becomes the president, what does he do?

He does everything that Hoover told him to do.

- In the book, you cite John Kenneth Galbraith's "The Great Crash of 1929."

- Yeah, great book.

- Galbraith was a friend of William F. Buckley Jr.

He was on this program, Buckley's version of the program, multiple times.

Take a look at this clip of him discussing the recession and recovery from 1992.

- We have entered into something that is new, dangerously new, and that is an unemployment, low-performance equilibrium.

We had that in the 1930s.

This is much less serious than it was then, but the notion that there is an automatic recovery process is something which we must now build a question.

And that means that we must ask then for much more affirmative, much more positive steps to get out of this equilibrium than we have yet had.

- So what does the 1929 crash teach us about whether the economy will automatically recover?

- That it won't, that the lesson is that you have to do perhaps the most politically unpopular thing in a moment of a crisis, which is you actually have to pursue bailouts.

You have to flood the system with money.

I would argue that Ben Bernanke actually learned that lesson doing his PhD thesis at Princeton on the Great Depression.

And then you saw him take it into action in 2008.

And boy, was it politically unpopular.

And then I would argue, by the way, you could go back even and look at the pandemic more recently.

What was the lesson of that?

You have to throw a lot of money at the problem.

And we did.

And that-- - And maybe it was too much.

- And, by the way, maybe it was too much on the other side.

But it's not preordained that an economy comes back after a crisis just because.

- Right.

You describe 1929 as the prequel to "Too Big to Fail."

You chronicle the 2008 financial crisis.

People were asking you in "Too Big to Fail," sort of how did it connect to 1929?

Now that you've chronicled them both, how are they connected?

How are they different?

- I think they're very connected because ultimately, every crash is really about one thing.

It's about credit, it's about debt, too much debt in the system.

That is the match that lights the fire of every financial crisis.

And then you layer on top of that some semblance of euphoria and some lack of transparency, and you get a disaster.

And I think that's what happened in 1929.

I think that's what happened in 2008 around subprime mortgages.

There was euphoria around real estate.

There was not the kind of transparency that you want, and there was massive piles of debt everywhere.

So I think that is the connection between those two and it's the connection in between whatever you think the next crisis or crash could be.

- Which you have said will happen, you just don't know how deep it'll be or when it'll be.

How do you advise ordinary Americans who hear you talking about these to prepare for the next crash that is surely coming?

- Okay, so here, now I'm not gonna... This is the opposite of talking my book.

The truth is that you will be much more successful as a professional optimist than as a professional skeptic or Cassandra.

Over time, over the last 100 years, if you had listened to the Cassandras the whole time and you've kept your money under your mattress, you would have lost.

- Right.

- So while I can clearly sit here and tell you that there will be a hiccup or worse in the markets, it would be impossible for there almost not to be at some point.

The question is how do you prepare for that?

And can we avoid something that looks like 1929, or can we avoid something that look like 2008?

And to make everybody maybe feel a little bit better, there is some good news.

There was no SEC in 1929.

There were no insider trading rules.

There were no margin rules.

Banks didn't have to have a particular amount of capital inside them.

None of those things existed.

And we have those things today.

- Where is the most leverage in the market today?

- Well, that goes to the very challenge of this moment, which is I think we don't know as much as we should.

It used to be that most loans came from banks and they were public banks.

It was very transparent to understand where the loans are.

- So you're saying the private credit markets?

- Private credit markets.

Today, most corporate loans are coming through these private credit vehicles that don't have the same kinds of disclosure.

And so we don't know the full extent of where all of the leverage is.

And that, living in the shadows, is one of the things that I worry about.

- And they're unregulated, aren't they?

- Completely unregulated for the most part.

- You recently told CNN that, "We're in a moment right now where the guardrails are coming off."

You just mentioned the SEC, the Securities and Exchange Commission, and other regulatory agencies that have been created since the Great Depression in order to prevent the guardrails from coming off.

- Well, we're in this interesting deregulatory environment.

There's a lot of conversation about democratizing finance, very similar to the 1920s in that regard.

And all sorts of new products that are gonna be put in the market around private credit and venture capital and crypto and all of these things into people's retirement plans and all sorts of other things.

By the way, I'm not ultimately against doing some of those things.

I'm against new innovative products.

The question is if you're going to introduce those kinds of products, what kinds of transparency do you really have around them?

What kinds of disclosures do you have around them?

And what's so unique about the new products that we're all about to experience is that effectively the disclosure rules that we've had for the last, call it nearly 100 years for publicly traded companies, we're now gonna take companies that have no disclosure rules and we're gonna allow them effectively to be in the public markets without the same rules.

- So looking back on 1929, what was your biggest aha moment as you researched, going through the archives.

I mean some of the critics have suggested that you ended up having a more favorable view of the banks.

- So my approach to writing this book is I really was trying to put myself in their shoes, and meet them where they were, not where necessarily I wanted them to be, where you would want them to or should be or what have you.

You know, it was a really unique world.

So some of them made very poor choices.

You could argue some of them were immoral choices.

Many of them were not illegal choices.

It's a very unique world to try to put your mind back in a place where there were no rules, where people didn't know where the lines necessarily were, and then say to yourself, "Well, what would have you done in those moments?"

And so I think it's very easy to look back 100 years and say, "Oh, scoundrels, can't believe that they were doing those things."

And yes, I can't believe that they were doing a lot of those things, but... - It was the Wild West, in a way.

- But now that I feel like I've actually been with them, I kind of can believe why they were doing these things.

- You write in the afterword, "No matter how many warnings are issued or how many laws are written, people will find new ways to believe that good times can last forever.

They will dress up hope as certainty.

And in that collective fever, humanity will again and again lose its head."

- It's who we are.

- Are you saying that as a free capitalist society, this is just the risk we have to live with?

- It's both a feature and a bug of our system.

We will always want more.

And that is not a bug.

That optimism is necessary to move us forward.

You want some semblance of speculation in the system, you need that for it to work to get to the next place.

But you're trying to thread a needle of having enough speculation, but not too much.

- Andrew Ross Sorkin, thank you for joining me on "Firing Line."

- Thank you so much for having me.

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